Google now uses Flash Video for playing movies on Google Video. I am as much an open source fan as any, but I support this move unlike some users. Macromedia has made a great player that is simple for the average user to use.
It's true that VLC would have worked fine for what they needed, but what's the big deal? The majority of users who will be using this service already have Flash installed in their browser. Why bother installing more plugins that do the same thing?
Google is a fast moving company wanting to provide the best service they can to the majority of users. They make very complicated systems run easily on computers with close to zero configuration and that's exactly what they have done here.
Google does loves idea of open source, yet they also love idea of functional and easy-to-use software. It's all about balance.
I could get into a lengthy rant about how many open source advocates take it way too far and don't believe anything good can come from closed source software... but I'll save that for another time.